Sunak’s tax cut package highlights weakness in UK economy

(Bloomberg) – Chancellor of the Exchequer Rishi Sunak’s call for businesses to boost investment highlights a key weakness in Britain’s economy that business leaders have long complained about.

Britain has fallen behind other advanced Group of Seven economies in the amount companies invest in everything from research and development to improved technology and equipment.

The gap has widened since the vote to leave the European Union and is one of the issues holding back the UK economy’s long-term growth potential. Sunak pledged this week to cut taxes to spur investment. While that doesn’t do much to solve the cost-of-living crisis plaguing consumers, it’s an idea embraced by business leaders.

“He has a very good point,” said John Browne, the former CEO of oil major BP Plc, in an interview. “We need to invest more in innovation and more in R&D. The industry is not spending enough. The balance is too much government spending.

Business investment is crucial as it increases productivity, which is also lagging in the UK. Boosting it would help Prime Minister Boris Johnson deliver on his promise to improve living standards in the country’s poorest parts as part of his ‘race to the top’ agenda.

The debate comes at a critical time for both the government and the executives. Many UK businesses are sitting on deep piles of cash after suspending dividends and capital investment plans at the height of the pandemic.

Many management teams are now opting to return much of that excess cash to shareholders, rewarding their patience after two difficult years of intermittent lockdowns amid a global supply chain crisis and runaway inflation.

Redemptions vs. investment

Companies such as Burberry Plc and Compass Plc and most major banks have announced major share buybacks in recent weeks. According to AJ Bell, oil company BP Plc’s decision to step up its share buyback program means that FTSE 100 companies are now collectively planning a record £37 billion in share buybacks this year.

It’s not just the big banks and oil companies that are bringing in the money either, according to Adrian Gosden, chief investment officer at GAM.

“I have small companies in my fund that are also buying back their shares because their shares are valued at maybe half their asset value. So why not?” said Goden.

Recommendations

The CBI, Britain’s largest employers’ group, has called on Sunak to boost investment by cutting taxes in a way that will encourage business. The lobby group notes that allowances granted by tax authorities to offset capital investments are far less generous than in other countries, particularly the United States.

“We will need to ensure that there is economic growth in the pipeline to avoid any downturn in our economy that could deepen or prolong the cost of living crisis,” CBI Director General Tony Danker said. “This will ensure that any company that halts its investments now will be bold, decisive and supportive of its original plans.”

British investment has suffered a series of blows in recent years. The uncertainty created by Brexit, the pandemic and the cost of living crisis means businesses are spending no more than seven years ago, and less than at the end of 2019, just before the pandemic hit. struck. Business investment accounts for around 10% of GDP in the UK, the lowest of any Group of Seven country.

In 2021, Sunak introduced an incentive that gives companies 25 pence off their tax bills for every pound they spend on qualifying plant and machinery. The so-called super-deduction was meant to boost investment as businesses unlock billions of pounds of cash built up during the pandemic to take advantage of the tax relief before it expires in 2023.

The Office for Budget Responsibility, the independent body that oversees government forecasts, predicted a 10.6% increase in investment in March, making it a key driver of growth this year. The Bank of England had been even more optimistic in its assessment a month earlier.

One criticism of the super-deduction is that it will only drive investment forward, only for businesses to curb spending when it is no longer available. In fact, businesses will face a double whammy next April. On the day the allocation ends, the corporate income tax rate is expected to rise by 6 percentage points, as part of Sunak’s efforts to reduce government borrowing.

Businesses want a permanent replacement, and the Treasury has opened a consultation on how to reform the capital cost allowance regime to “stimulate and sustain growth” in the future.

“Simple actions such as expanding the scope of corporate rate relief to help more businesses, such as those in the automotive sector, would allow more businesses to invest and grow,” a spokesperson for automaker Aston Martin said in a written response to questions.

As the economy faces a possible recession, war in Ukraine disrupts supplies and trade tensions escalate between Britain and the EU, doubts grow over whether investment will get the hit inch expected.

Earlier this month, the BOE cut its forecast for this year and said it had seen virtually no investment growth in 2023. Meanwhile, the CBI said this week that manufacturers had revised to lowered their plans for investment in the machinery plant and expected to cut spending on buildings.

©2022 Bloomberg LP

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